No Exit; No Matter

by francine Hardaway on July 29, 2010

You may have heard that the luminaries like Mark Zuckerberg and Reid Hoffman have taken some money off the table even though their companies haven’t been sold or gone public. How exactly did this happen? Yesterday I listened to a fascinating panel by some of the guys who made that possible, and learned about their own agendas.

the cast: Barry Silbert. Founder of SecondMarket, who created the secondary market for Facebook shares; Ted Smith Union Square Advisors M&A Advisors; and Sam Schwerin of Millennium Technology Ventures, which provides-secondary liquidity to companies like Facebook and Epocrates.

The growth of the new secondary markets, which are made up of a very small number of companies that provide liquidity to entrepreneurs whose companies are still private, came about in response to a need: the macro IPO market no longer exists. Two decades ago, the Average time required for a company to go public was 4-5 years. It is now 10.4 years. why? Well, there are no more boutique bankers and brokers. And decimalization has reduced the spread while online trading has destroyed commission prices.

Moreover, If you go public at less than $1b, your company’s average trading volume will be down by a factor of 5, and the number of analysts covering you will be down by half.
Crank In the costs associated with Sarbanes-Oxley and the fact that younger CEOs resent having to show concern for quarterly earnings, and companies tend to stay private longer. It’s no longer very desirable to go public. And so there comes to be a need for a secondary market to create liquidity for entrepreneurs and their early investors.

This year, although IPO filings rose, only 33% were successful in getting out and only 42% of them traded up when issued. Because 2010 is almost over from the IPO window perspective, the other companies that filed probably won’t get out on the street and will choose to pull their IPOs.
Bankers thus suggest a dual track process, in which you file for an IPO, but you are really doing is putting your company up for sale. For the strategic acquirers, however, the threat of IPO isn’t really a threat anymore, so they will wait and let the market price the stock.

And even if you go public, it is not an exit anymore, because you are probably stuck with up shares. So according to these guys, the secondary market has become respectable way to liquidity, and capital is coming into the secondary market. To me, this sounds a bit self-serving, and indeed one of the panelists admitted that because they can’t advertise, can’t talk price, and have to sell to sophisticated investors only, secondary markets are a tool, not a strategy.

But these tools are now available to entrepreneurs both for employee retention and for exits, and like any tool, can really construct or deconstruct a company.

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